A Leasing Term Guide for Restaurant & Retail Owners
Contrary to what a landlord might tell a new tenant, most leases are negotiable. Commercial leases are complicated and there is no "standard" form, so each provision requires careful review.
This checklist is intended to identify some of the most important issues for tenants of retail and restaurant spaces, which should be carefully addressed in a landlord's lease form. Remember, business owners should be wise and have an attorney review this document prior to signing.
1. Tenant Formation
Form an entity that shields individuals from personal liability—for instance, a corporation or limited liability company—even if the business is run by one or two individuals or spouses. That entity should sign the lease.
2. Landlord's Work
The improvements to the premises that the landlord constructs must be specified in detail. Terms such as "grey shell" or "white shell" are not sufficient. The specifics of what additions or improvements will be applied to the space should be clearly outlined. If the landlord's work is not completed by a specified date, the tenant should be entitled to terminate the lease.
3. Measure the Premises
The tenant should reserve the right to measure the premises after the landlord's work is completed, and adjust proportionate share of common expenses accordingly. The basis for measurement should be specified. "Rentable" and "useable" square footage are entirely different concepts, and different types of space use different methods of measuring the square footage.
4. Relocation of Premises
Restaurants, in particular, should resist any right of the landlord to relocate the premises. The value of the business may depend on its location, visibility, access, the ability of customers to find it, and its proximity to other stores. If the landlord insists on the right to relocate, the tenant should get notice, premises of the same size and configuration, and completion of the tenant improvements by a given date—with the right to abate rent and new directory signage.
5. Permitted Use
The permitted use should be defined as broadly as possible: "general office" or "general retail" uses are best. The landlord should represent that the permitted use is allowed by zoning, applicable laws and property restrictions.
6. Continuous Operation
If the landlord requires continuous operation, meaning the tenant is required to operate its business in the leased premises continuously throughout the term of the lease, there should be exceptions for employee training, renovation, restoration, repair, maintenance and holidays.
7. Operating Expenses
As a general matter, the tenant should pay a proportionate share of only maintenance and operating expenses of the common area, and not any capital repairs or improvements.
8. Increases in Operating Expenses
There should be a percentage limit in the increase in annual operating expenses for controllable expenses—typically, everything but taxes, insurance and utilities.
The tenant should receive an annual statement of the operating expenses with a right to conduct an audit. If the tenant discovers errors, the landlord should reimburse the tenant, and if the errors are above a certain percentage, the tenant should also be reimbursed for the cost of the audit.
10. Base Year
If the increase in the operating costs is relative to a base year, the tenant should ensure that the base year actually reflects the costs the landlord would incur in a typical year. For instance, the landlord may successfully challenge real property taxes and obtain a refund or receive payment on a guaranty, insurance or third-party claims during one or more years following the base year.
11. Exclusive Use
The tenant should obtain an exclusive right to conduct business. The right should be as broad as necessary to ensure that it does not lose business to competitors.
12. Tenant Alterations
In no event should the tenant be under any obligation to alter the premises to conform to any change to law, rule, regulation or ordinance, unless specific to tenant's use or as a result of any modification to the premises by the tenant. The tenant should be entitled to make alterations as long as they are not to the structural elements or building systems, and do not exceed a certain cumulative amount.
13. Tenant Maintenance
In no event should the tenant be responsible for structural elements, public stairs, elevators or mechanical systems (including HVAC), plumbing, electricity, security and other similar installations.
14. Landlord Obligations
The landlord should be obligated to operate, repair and maintain the building in a first-class manner and in conformance with all applicable laws, rules, regulations and ordinances. In all events, the landlord should not impair the visibility, access or use of premises.
Assignments of a lease, whereby all rights that a lessee or tenant possesses over a property are transferred to affiliates, franchisees or franchisors, should be permitted without landlord's consent. The tenant should be released from liability after an assignment.
The tenant should require a Subordination, Non-Disturbance and Attornment Agreement (SNDA) from the existing lender as a condition of executing the lease. They should not agree to subordinate its interest to any future lender unless the lender agrees not to disturb the tenant's use of the premises and agrees to cure any continuing defaults by the previous owner.
About the Author: Bruce B. May
Bruce B. May has spent his career as a lawyer representing all aspects of commercial real estate transactions throughout Arizona.